You should do this only if you do your own homework and decide that there may be hope of good news for a company.

First, what’s a short squeeze?

To answer that question, we must discuss how short-selling works. An investor who expects a particular stock to fall borrows shares from a broker and immediately sells them. If the investor is correct and the share price drops, she can “cover” the position by buying back the shares at the lower price, returning them to the lender at the original price, and pocket the difference.

If the stock rises, however, the broker who lent the shares may demand collateral to protect against the chance that the short-seller will be unable to cover his position. As the stock climbs, the short-seller faces a nerve-racking decision of whether to cover quickly and take a loss, or wait out the market in hopes the shares will decline as originally expected.

A short squeeze happens when there’s a large amount of short interest in a stock and some good news sends the shares higher. At that point, orders placed by multiple short-sellers create so much demand that the stock pops. The short-sellers just can’t buy shares fast enough.

That happened with Volkswagen AG shares in October 2008, when the car maker’s stock soared 83% and briefly became the world’s most valuable company by market value. The catalyst: Word got out that Porsche Automobil Holding SE was loading up on Volkswagen shares.

Why do short-sellers panic when they’re wrong? Because of the unlimited risk potential. If you buy stock in a company, and the company goes bankrupt, you lose 100% of your investment. But if you short the shares, and then they keep going up, there’s no limit to how much money you might lose, and a lender’s demand for collateral can send you scrambling.

So shorting stocks is best left to sophisticated or professional investors.

But you can learn quite a bit from high-profile short investors, including David Einhorn and Bill Ackman, who often make public comments about the stocks they are shorting. It may not be a good idea to go along for a ride with those investors, but it can pay to listen to their concerns over companies’ business strategy or accounting.

And if a heavily shorted company can turn things around, a potential short squeeze may be around the corner.

It may be a stretch to predict all those companies will fail, but it’s an instructive exercise to drill down and see what we can find. Here’s a table of those companies, plus BlackBerry. The table shows short interest as a percentage of the available common-share float at Friday’s market close and at the end of 2013:

RadioShack

It might surprise you that short interest in RadioShack declined to 31.1% Friday from 40.9% at the end of 2013. But the 55% drop for the shares this year has led to short-sellers covering to walk away with profits.

Another factor in declining short interest for RadioShack is the high cost for borrowing shares. According to Brad Lamensdorf, co-manager of the AdvisorShares Ranger Equity Bear ETF HDGE, +0.54%
there are “no shares available” for borrowing. If a broker is pressed by a short-seller, the “negative carry” to borrow RadioShack shares is 75%. That means an investor building a new short position pays an annual rate of 75% just to borrow the shares. To break even over a year’s time, the shares would have to drop 75% from here.

In a phone interview Monday, Lamensdorf said the AdvisorShares Ranger Equity Bear ETF had no short positions in any of the six stocks listed on the table.

An investor building a new short position in RadioShack could make money if the company goes bankrupt, but she will pay dearly for the privilege.

Here are some quick comments on the remaining five companies listed above:

J.C. Penney

As of Friday’s close, 26.8% of J.C Penny’s shares available for trading were sold short, which is down a bit from the end of 2013. The company has reported negative earnings per share for 10 of the last 11 quarters. Please see “12 bargain-bin stocks to buy low, sell high” for details on the company’s finances, including its first report of growth in comparable-store sales in nearly three years.

Despite the heavy short interest, it’s easy to short J.C. Penney’s shares. Borrowing them costs only 2.55% a year, according to Lamensdorf.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.